ONEOK (NYSE:OKE) is coming off an excellent year. Not only did the company grow earnings and cash flow by more than 20%, it also secured $5.5 billion of expansions that will drive continued growth over the next few years.
The company's management team spent some time on the fourth-quarter conference call outlining what they see ahead. Here are four things they wanted investors to know about the company's future.
1. It expects continued growth in 2019
ONEOK's EBITDA surged 23% last year thanks to higher volumes across all three of its segments. While the company won't grow quite as fast this year, it still sees earnings increasing 6% year over year. CFO Walt Hulse walked through the factors driving the company's continued growth by stating:
We expect year-over-year earnings growth in all three of our business segments, with Natural Gas Liquids [NGL] segment expected to be the largest contributor to that growth. We expect key drivers for 2019 to include our recently completed Sterling III and West Texas LPG pipeline expansion projects. We expect the completion of the southern portion of Elk Creek pipeline in the third quarter, additional third-party plant connections in our NGL segment, and increased volumes and a higher-average fee rate in our gathering and processes segments.
Overall, the company expects 2019 to be a solid year, as all its segments should benefit from continued production growth in the U.S.
2. It expects growth to reaccelerate in 2020
In addition to providing its guidance for 2019, ONEOK also unveiled a glimpse of what it sees ahead for 2020. CEO Terry Spencer stated:
We expect a greater-than-20% increase in adjusted EBITDA in 2020 compared with 2019 expectations. More than $4.4 billion of capital growth projects expected to be completed in 2019 and in the first quarter of 2020 will provide a foundation for significant earnings growth in 2020 and beyond.
ONEOK is in the midst of a major expansion phase after securing $5.5 billion of capital projects last year, the bulk of which won't enter service until later this year and early 2020. That time frame positions the company to deliver accelerated earnings growth in 2020, which should carry over into 2021.
3. It has the financial capacity to fund its current slate of expansions
ONEOK invested $2.1 billion in expansion projects last year and anticipates spending another $2.5 billion to $3.7 billion in 2019. While ONEOK's free cash flow after paying its dividend has been on the rise, it won't come close to covering its capital needs in 2019. However, as CFO Walt Hulse pointed out on the call:
With our strong balance sheet, expected continued earnings growth, and financial flexibility, we expect no equity financing needs in 2019 nor in 2020, based on our expected slate of growth projects and our rapid deleveraging as these projects come online.
In other words, the company doesn't need to dilute existing investors by selling any more stock to fund its current slate of expansions.
Instead the company currently plans to use its available borrowing capacity to bridge the gap between its excess cash and capital expenses. While that will cause its leverage ratio to rise in the near term, ONEOK ended last year with a low 3.75-times leverage ratio, which gives it plenty of breathing room to get through this heavy investment period. Meanwhile, as these expansions start coming online and generating earnings, it will push leverage back down.
4. It has more projects under development
While ONEOK already has a large backlog of expansions under way, CEO Terry Spencer stated:
We continued to evaluate additional opportunistic projects that address customer needs and the increasing demand for NGLs and natural gas in the U.S. and abroad.
He then noted:
One of these projects, which has received a lot of attention, is the potential NGL export facility. What I can say is that we're closer to a deal now than we've ever been, but there are a number of details that still need to be worked out before we announce anything further. We're optimistic about where we are in the process and believe this facility would be a great fee-driven addition to our already predominantly fee-based business model.
The company has been working on adding export capabilities to its portfolio because, according to Spencer,
exports are a natural progression for us in the value chain.
It seems to finally be closing in on a project that would accomplish that goal, currently working on a joint venture that would help finance the more-than-$500 million facility. This project is one of a few opportunities the company has under development, some of which involve additional NGL fractionators, which would process raw NGLs into higher-value products like propane and ethane.
Lots of growth ahead
ONEOK is building a large slate of expansion projects that will enable the company to continue growing earnings this year before shifting into a higher gear for 2020. Meanwhile, it has the financial capacity to fund this growth without diluting investors, which means it will drive an equally fast growth rate on a per-share basis. On top of that, the company has additional expansions under development, which could give it the fuel to continue growing earnings at a healthy pace well beyond next year. That upside is one of the many reasons ONEOK looks like a great stock to buy and hold for the long-term.